Hello and welcome to your weekly pulse of public policy (delayed slightly so I could re-read it after a night’s sleep before sending – it deals with some slightly abstract material). It was starting to feel like a while since I’d looked at any nitty-gritty tax or regulatory issues here, so I had a look round to see if anything had happened at least fairly recently that would be worth a look. I found something. Last month, the Prime Minister has asked Matt Warman, MP for Boston and Skegness, to lead a quick review of issues relating to work: he has been mandated, effectively, to find quick wins, by having a look at the general situation and then finding a few priority items to settle on. He’s due to finish work by the autumn.
I’m not interested in looking at the Warman Review. But I am interested in one of the major issues that will be far too big and thorny for it to pick up as a priority: employment status. There is widely recognised to be a bit of a problem with employment status in the UK, which gives rise to a range of often tricksy, awkward policy problems relating to both employment and tax. It was an issue I worked on professionally in the second half of the 2000s, when it seemed as though all roads led back to employment status, no matter what issue I had started out by looking at. As I burrowed into Warman’s terms of references, and in turn into what had happened as a result of the Taylor Report that they mention, it became clear that there had been more activity in this area over the 2010s than I had realised, but also that we are no closer to a policy solution than before.
In fact, for all that this article will focus on where there are problems, in lots of ways our current arrangements work well: in straightforward employment situations, things are cleat-cut; and there is plenty of flexibility for workers and hirers who know what they’re doing to get work done on terms that are appropriate for the task in hand, whether that means hiring someone in on a temporary or project basis, having a bank of staff available to pick up work at busy times, or whatever. But that still leaves enough cases where things are confused or go wrong to say pretty firmly that there is a policy problem here, with many other problems arising from it.
So, why do so many problems flow from employment status? On one level, this is obvious: your rights as a worker depend on what type of worker you are, and in the UK we have three categories: employee, worker (meaning an agency worker, basically), and self-employed. The tax and national insurance contributions you pay are also determined by your employment status, but we only have two categories for tax purposes: employee (which includes workers, and means paying through PAYE) and self-employed (meaning you have to self-assess). The imperfect match between categories should immediately give away that this is a messy area, although as long as everyone’s clear what category they’re in, it shouldn’t be too bad.
Trouble is, lots and lots of people don’t know what category they are in, or why. This isn’t just down to the rules being complicated and obscure – though they are, as we’ll see – but also down to a widespread lack of understanding of how you end up with this or that employment status. As the Taylor Report (of which plenty more later) put it:
“Many employees and employers are unaware they don’t decide what an individual’s employment status is, that it’s a factual assessment of the nature of their relationship. In combination with this, there appears to be a general lack of awareness of the fact that contracts do not need to be in writing, that the above is a substantive test of what exists in reality and not on paper.”
In other words, you can’t pick your status: it’s determined by what you do in practice, not what you intend or what is written on paper.
On top of that, the rules for assessing what your status is are quite obscure. They have never been defined in legislation: instead, tribunals and courts have worked them out over time. The up-side of this is that they have been developed in a way that reflects real-world practice, as the courts have had to address real-life situations placed in front of them. The down-side is that there is no single, definitive list of the rules, like there would be if it was all in legislation.
In fact, I’d go out on a limb and argue that while the rules are obscure, they’re not that complicated. That’s relative of course, and they’re not super-simple either, but they can be fairly uncontroversially summarised as follows. You’re self-employed unless your work has all three of the following features:
Personal service, meaning the person hiring you wants you specifically, and won’t agree to you sending someone else to do the work instead
Direction and control, meaning you get told how to do the job, whether in terms of detailed method or things like time, place, wearing a uniform, etc.
Mutuality of obligation, meaning there’s an ongoing expectation that you’ll be given work and that you’ll keep turning up to do it, so you can’t just be sent home unpaid on an afternoon when things are slack.
If you meet those three criteria, you’re an employee. (For worker status, it’s direction and control alone that is the critical test.) In borderline cases, wider factors such as whether the individual appears to be in business on their own account, or appears to be part and parcel of the hiring organisation, will be considered. In practice, applying those tests to complex or borderline cases can be difficult, but mostly it’s perfectly doable. So why is there a problem?
For one thing, there are incentives to classify people incorrectly, and given that the tests are obscure it can be easy to misclassify people without it being obvious that that’s what’s going on. In theory these could cut both ways: an individual might be very keen to be classified as an employee in order to get the benefits such as protection from unfair dismissal, paid annual leave, and so on. But in practice, there is an imbalance of power between workers and hirers: there isn’t really any way for an individual to misclassify themselves to get employment benefits, but there are ways for hirers to misclassify employees as self-employed – after all, it’s the hirer who pays the money, so the individual has a strong incentive to go along with what the hirer tells them to do.
Employers have multiple incentives for getting staff off their payroll. A big one is avoiding the cost of paying employer’s national insurance contributions. They also get to avoid costs like paying sick pay when staff are unwell. And appearing to have a smaller staff headcount can make a business look more financially attractive to shareholders or investors. In some circumstances, this incentive can align with a desire on an individual’s part to secure the slightly improved tax treatment available for the self-employed, but “bogus self-employment” is most commonly a problem of employers exploiting relatively vulnerable workers who variously don’t understand their rights, don’t have the wherewithal to assert their rights, and don’t have the clout in the labour market to be able to hold out for proper pay and conditions.
The upshot is that all sorts of messy situations and weird behaviours crop up in our labour market. Hiring companies are uncertain about the rules and are naturally conservative, so will often insist on someone being either on the payroll and therefore clearly an employee or having an intermediary (a limited company, an umbrella company or an agency) in the contractual chain between them and the hirer. They feel this gives them protection against being found to be the employer of someone they had intended to take on as self-employed, although in practice tribunals can “look through” companies in the chain and find an employment relationship to exist. There are other rules (IR35) that allow the tax man to ignore a limited company and tax the individual as though they were an employee (and in fact even more heavily, as the individual is then on the hook for the employer’s NICs). Controversies over whether people working for app-based services are self-employed, workers or employees stem directly from the same ambiguities and confusions. So you can have people taxed as heavily as employees without any of the benefits, or (so long as they don’t get caught) people taxed as self-employed but working effectively as employees.
The debate about how to address this mess has been as long-running as the problem itself. Ideologically-motivated trades unions can be relied on to call for a clampdown on bogus self-employment and banning zero-hours contracts (seriously, you can put money on it, whatever the underlying problem is), apparently with a view to perpetuating the master-servant employment relationship that Marxist theory says should be overthrown, so pick the bones out of that. Slightly more practical thinkers call for the differences between employees and the self-employed to be ironed out, and while the treatment of NICs paid by workers has been evened up somewhat lately, how you get round the matter of employer’s NICs, which by definition can’t rationally be levied on commercial (ie self-employed) contracts has yet to be answered – they raise far too much revenue to simply bin them off. More generally, I question whether this approach of removing incentives to misclassify workers is a sensible one at all: employee rights and NIC treatments have arisen for good reasons, and by reversing or removing them you’d mostly just be reinstating the problems they originally set out to solve.
A sub-set of the removing incentives approach is simply to foist the problem onto workers: so, recent changes to the IR35 rules have incentivised hirers to treat contracts as IR35-caught, leaving the worker to take the hit of the financial disadvantage without employment benefits. Ironically, this is government policy taking advantage of the same imbalance of power that makes it easier for hirers than individuals to misclassify workers: ultimately, the workers need to get paid, so enough will take the hit. What’s more, an approach that shifted risk onto hirers – such as, say, aligning tax and employment status so that any misclassified worker found to have paid insufficient tax also accrues full employment rights from their hirer at the same time, would be fiercely resisted by employer interest groups, who are more organised and better resourced than worker interest groups (whether trades unions or trade associations). It’s a classic example of policy being shaped by the landscape of vested interests (and of why The Wire is the greatest policy textbook ever written – maybe that’s a topic for a future article…).
I’d argue that a solution to the mess of employment status requires two things. The first is to define status in statute, and take it out of the obscurity it currently languishes in. I’m unconvinced there is any real scope for simplifying the tests themselves: they were developed along the contours of real-world behaviour, while any new and simpler test will immediately create an incentive for employers to miscategorise workers by adopting the form of the new self-employment definition; the simpler and more artificial nature of any such definition will make it easier to adopt the new format and game the system, irrespective of the actual nature of the working relationship. Doing the same with the current tests, which have been developed directly from real-world practices, is much harder.
Now, that might sound slightly odd: after all, we’ve seen that employers have plenty of scope to game the existing tests. And that brings me to the second necessary plank in any reform: enforcement. Misclassification of workers happens through a mix of confusion (for reasons outlined) and cynicism (hirers know they have a good chance of getting away with it). For a very small number of employment rights, there is state enforcement (national minimum wage, and specific rules relating to agency workers), and for individuals’ tax affairs there is also state enforcement (HM Revenue and Customs). But there is no state enforcement of other employment rights, or employment status generally: the onus is on the individual to go to a tribunal, and the first thing they must do there is prove that they are an employee to begin with, which as we’ve seen can be a trickier business than you might expect.
A public body with a clear remit for employment status compliance is essential to solving the current mess. Put another way, instead of removing incentives to misclassify workers (with a load of harmful knock-on consequences), we need to balance them with clear disincentives to do so, including employment status audits and substantial fines for non-compliance (along with providing useful advice and support to help hirers get it right, obviously). Ultimately, it doesn’t matter how clear the law is if the only way to enforce it is a long-winded and costly mechanism like an employment tribunal. The state has a role in ensuring employment status is clear across the economy. Any such regulator would quickly become a bogeyman for businesses: expect endless carping from business groups and the Daily Mail. There would also undoubtedly be a period of disruption in the labour market as many businesses adjust to their new understanding of the rules. But the end result should be businesses settling into patterns of behaviour that actually reflect how employment status works, not the hotch-potch of weird workarounds often based on misunderstandings that we have now.
So, what happened across the 2010s, and has it made a workable resolution of the status mess any more likely? Remarkably, for a while it looked like there might be an outbreak of common sense in employment status policy… but the moment was fleeting.
Things picked up in 2014, when the Office of Tax Simplification, created by the Coalition, was tasked with reviewing employment status. Inevitably it looked at it only for tax purposes, but the report was well written and recognised the interplay with employment rights. A bit like the Warman review, it was framed as quite a speedy, limited exercise, and was up-front about being unlikely to find a solution. It identified that putting employment status in statute has its challenges, but ultimately concluded that it should be explored further, given the “clear attractions” of doing it successfully.
Next came the Taylor Review, a major exercise looking at many aspects of work and the workforce, under Matthew Taylor. It reported in 2017 and remains the key reference point for many discussions of work- and employment-related policy today. As part of its response, Theresa May’s government issued a “Good Work Plan” and launched consultations on its recommendations in four areas: perhaps astonishingly one of those was its recommendation to put employment status into statute. Even more surprisingly, it was a pretty good consultation document, that had a clear view of the key issues: it’s a rare and happy day when the note I’ve scribbled in the margin about a point the document hasn’t addressed mostly turns out to be the next thing it goes on to discuss.
The consultation closed in June 2018… and officially, the government is still reviewing the feedback on it. Clearly, we’ve had a change of government since then, and realistically it’s not going to get picked up again: I can’t think of a policy initiative being resumed after being left hanging for so long – revisited from scratch, maybe, but not picked up from where it was left. I wonder if this might be an example of initiative that officials were redeployed away from in the second half of 2018 as the government started to ramp up its planning and preparation for a possible No Deal Brexit in the spring of the following year (we can easily forget now just how much effort was expended in this contingency planning). The Queen’s Speech in 2019 did commit to an Employment Bill, but not one including employment status; and even that has been kicked down the road ever since. Bearing in mind that we are almost certainly no more than two years away from a general election, there isn’t really enough time to pick the issue up again, develop legislation and get it through Parliament now, even if the government was minded to do it.
However, the consultation was only on the first of the two elements that I argue are necessary to resolve the problem (putting status in statute). There has in fact been movement on a new enforcement body as well… but unfortunately, employment status has not been slated as one of its responsibilities.
Also arising from the Taylor Review was a consultation on a single labour market enforcement body. This would be a merger of the three existing agencies in this area: HMRC National Minimum Wage Enforcement; the Gangmasters and Labour Abuse Authority; and the Employment Agency Standards Inspectorate. While it would have a mandate to provide guidance and support to businesses, as well as enforcement, its remit would not cover employment status. Given that the assertion of a worker’s rights so often depends on establishing their status, and therefore their rights, to begin with, I can’t help but think this might make it hard for such an organisation to achieve as much impact as it could. Still, it may be created: the government issued a response to its consultation in June last year, and pledged to develop the new body.
If anything, it’s a pleasant surprise that any government got as close to addressing employment status as happened a few years ago. It’s a thorny problem, where the consequences of any solution will be disruptive for multiple years as behaviour by workers and hirers adjusts to the new regime, having often been based on a faulty understanding of the old one. It can be abstract and difficult to grasp, and will never make headlines despite the significant problems that flow from it. Unfortunately, and perhaps for that reason, it did not demand sufficient political priority to see reforms through, and in my view the proposed changes were missing an essential element in any case. It’s around 17 years now since I first started working on employment status as a policy issue, and I wouldn’t bet against being able to draw the same conclusions in Policy Pulse 846 in 2039.